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Deficits & Debts: Crash Course Economics #9

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Definition - Monetary policy is the macroeconomic policy laid down by the central bank (the FED). It involves management of money supply and interest rates. It is used by the government to achieve macroeconomic objectives like inflation, consumption, and growth.

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Definition - Monetary policy is the macroeconomic policy laid down by the central bank (the FED). It involves management of money supply and interest rates. It is used by the government to achieve macroeconomic objectives like inflation, consumption, and growth.

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The deficit is the difference between what the U.S. Government takes in from taxes and other revenues, called receipts, and the amount of money it spends, called outlays. The items included in the deficit are considered either on-budget or off-budget.

You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the U.S. Treasury to borrow money to raise cash needed to keep the government operating. It borrows the money by selling securities to the public.

The Treasury securities issued to the public and to the Government Trust Funds then become part of the total debt.

SOURCE: Treasury Department

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What's the Difference Between the Debt and the Deficit?

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The deficit is the difference between what the U.S. Government takes in from taxes and other revenues, called receipts, and the amount of money it spends, called outlays. The items included in the deficit are considered either on-budget or off-budget. You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses.

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Despite the challenges from abroad with China struggling to maintain economic growth and various European nations struggling to create economic growth, the U. S. economy is still showing positive results, thanks to strong corporate and consumer balance sheets. And yet, concerns about the U. S. national debt and deficit continue to be recurring themes among both investors and advisors.

People often confuse the terms "debt" and "deficit." Although the two are related, they are very different.

1. National deficit - an annual measure that results when the money the government spends (outlays) is more than what government takes in (receipts).
* Outlays - social security, defense, Medicare, interest payments and other expenses
* Receipts - income tax, excise tax, social insurance tax, fees and other income

2. National debt - the cumulative amount outstanding that the government has borrowed to finance deficits.

To add clarity to the relationship between the deficit and the debt - running annual deficits increases the total outstanding national debt. Running a surplus would reduce the amount of outstanding national debt. This interplay between the national deficit and debt explains how the national deficit can decrease while the national debt increases.

Spending by any other name
The U.S. has run a deficit in 45 of the last 50 years. The fiscal year for the government runs from October to September. Numbers through August 2015 indicate that the U.S. is running another deficit this year (to the tune of $530 billion). As seen in the chart below, the good news is that the deficit hit a high in 2009 and has since shrunk. This was a result of growing revenue offsetting similar spending patterns.

Unfortunately, spending more than you make, even when you make more, is still spending more than you make. The result is a consistently growing national debt since the last surplus in 2001. The current national debt is $18.2 trillion. The U.S. has had to fend off government shutdowns multiple times in previous years while trying to approve higher debt ceilings, which is just another way to track the ballooning national debt. The national debt we currently have is largely a function of the economic stimulus effort enacted from 2009 through 2011.
Source: Congressional Research Service. National Priorities Project.
The national deficit has shrunk relative to past years, but almost entirely as a result of a stronger economy driving more revenue into the government's hands. As illustrated in the chart below, the national debt has become a smaller percentage of a growing gross domestic product.

There is only so much growth can fix. The interest rate on debt has been near zero by design, but it is about to go up, as the Federal Reserve begins raising the federal funds rate. This phenomenon will increase the government's annual outlays, which will be a catalyst driving a higher deficit, absent other spending reductions or more revenue. As a nation, the United States must get spending under control to help the move back to a surplus status in order to begin consistently reducing the national debt.

Bottom line
So what does this all mean for investors? Arguably, very little. In fact, the stock market has historically delivered higher performance when the deficit is high, as the nation is emerging from recession. Of greater concern is the political shenanigans that result in government shutdowns or the fiscal mismanagment that we see in places like Greece and Puerto Rico-but those are topics for another time. Today we can just be happy that the US government has reached an agreement on the budget and, pending House approval, it will continue to operate as normal until March 2017.

John Frownfelter

John Frownfelter is the investments contributor for Practically Speaking and the managing director of investment solutions within the SEI Advisor Network.

Learn More About John Frownfelter

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Deficit vs. Debt: A Cheat Sheet - SEI's Practically Speaking

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Despite the challenges from abroad with China struggling to maintain economic growth and various European nations struggling to create economic growth, the U. S. economy is still showing positive results, thanks to strong corporate and consumer balance sheets. And yet, concerns about the U. S.

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Difference between Monetary and Fiscal Policy

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Difference between Monetary and Fiscal Policy

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Basic mechanics of monetary and fiscal policy

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The total value of goods produced and services provided in a country during one year.

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a budget deficit is the difference between what the federal government spends and what it takes in.

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An example of monetary policy is when the Fed raises or lowers the discount rate to affect inflation and unemployment. In order to increase or decrease money supply, the Fed sells government bonds or buys them back.

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Fiscal policy is the government spending and taxation that influences the economy.

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The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, the Q3 2017 GDP is up 3%, this is thought to mean that the economy has grown by 3% over the third quarter. While quarterly growth rates are a periodic measure of how the economy is faring, annual GDP figures are often considered the benchmark for the size of the economy. The United States has a GDP of $18,869.4 billion as of the fourth quarter of 2016, according to the Bureau of Economic Analysis.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year ( income approach), or by adding up what everyone spent ( expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending, and net exports.

As one can imagine, economic production and growth - what GDP represents - have a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why; a bad economy usually means lower earnings for companies, which translates into lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

For more on this topic, see Is real GDP a better index of economic performance than GDP? and Macroeconomic Analysis. To stay on top of the latest macroeconomic news and analysis, sign up for our free News to Use newsletter.

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What is GDP and Why Is It So Important To Investors?

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The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy.

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Inflation impacts purchasing power because it alters how much a person can purchase. If inflation is high then purchasing power will decrease; if inflation is low then purchasing power will increase.

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What is 'Purchasing Power'

Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.

In investment terms, purchasing power is the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account. (For further insights, see: Buying Power)

To measure purchasing power in the traditional economic sense, you would compare against a price index such as the Consumer Price Index (CPI). A simple way to think about purchasing power is to imagine if you made the same salary as your grandfather. Today you would need a much greater salary just to maintain the same quality of living. Similarly, a homebuyer looking homes in the $300,000 to 350,000 price range had more options to consider ten years ago.

Purchasing Power in Context

Purchasing power affects every aspect of economics, from consumers buying goods, to investors and stock prices, to a country's economic prosperity. When a currency's purchasing power decreases due to excessive inflation, serious negative economic consequences arise, including rising costs of good and services contributing to a high cost of living, as well as high interest rates that affect the global market, and falling credit ratings as a result. All of these factors can contribute to an economic crisis.

As such, a country's government institutes policies and regulations to protect a currency's purchasing power and keep an economy healthy. One method to monitor purchasing power is through the Consumer Price Index. The U.S. Bureau of Labor Statistics measures the weighted average of prices of consumer goods and services, in particular, transportation, food and medical care. The CPI is calculated by averaging these price changes and is used as a tool to measure changes in the cost of living, as well as considered a marker for determining rates of inflation and deflation.

A concept related to purchasing power is purchasing price parity (PPP). PPP is an economic theory that estimates the amount that needs to be adjusted to the price of an item, given two countries' exchange rates, in order for the exchange to match each currency's purchasing power. PPP can be used to compare countries' income levels and other relevant economic data concerning the cost of living, or possible rates of inflation and deflation.

The History of Purchasing Power

Historical examples of severe inflation and hyperinflation - or the destruction of a currency's purchasing power - have shown there are several causes of such a phenomenon. Often expensive, devastating wars will cause an economic collapse, in particular to the losing country, such as Germany during World War One (WWI). In the aftermath of WWI during the 1920s, Germany experienced extreme economic hardship and almost unprecedented hyperinflation, due in part to the enormous amount of reparations Germany had to pay. Unable to pay these reparations with the suspect German mark, Germany printed paper notes to buy foreign currencies, resulting in high inflation rates that rendered the German mark valueless with a nonexistent purchasing power.

Today, the effects of the loss of purchasing power are still felt in the aftermath of the 2008 global financial crisis and the European sovereign debt crisis. With increased globalization and the introduction of the euro, currencies are even more inextricably linked. As such, governments institute policies to control inflation, protect purchasing power and prevent recessions.

For example, in 2008 the U.S. Federal Reserve kept interest rates near zero and instituted a plan called quantitative easing. Quantitative easing, initially controversial, essentially saw the U.S. Federal Reserve buy government and other market securities to lower interest rates and increase money supply. The idea is that a market will then experience an increase in capital, which spurs increased lending and liquidity. The U.S. stopped its policy of quantitative easing once the economy stabilized, due in part to the above policy and a multitude of other complex factors.

The European Central Bank (ECB) also pursued quantitative easing to help stop deflation in the Eurozone after the European sovereign debt crisis and bolster the euro's purchasing power. The European Economic and Monetary Union has also established strict regulations in the Eurozone on accurately reporting sovereign debt, inflation and other financial data. As a general rule, countries attempt to keep inflation fixed at a rate of 2% as moderate levels of inflation are acceptable, with high levels of deflation leading to economic stagnation.

Purchasing Power Loss/Gain

Purchasing power loss/gain is an increase or decrease in how much consumers can buy with a given amount of money. Consumers lose purchasing power when prices increase, and gain purchasing power when prices decrease. Causes of purchasing power loss include government regulations, inflation and natural and manmade disasters. Causes of purchasing power gain include deflation and technological innovation.

One official measure of purchasing power is the Consumer Price Index, which shows how the prices of consumer goods and services change over time. As an example of purchasing power gain, if laptop computers cost $1,000 two years ago and today they cost $500, consumers have seen their purchasing power rise. In the absence of inflation, $1,000 will now buy a laptop plus an additional $500 worth of goods.

Which Securities Offer the Best Protection Against Purchasing Power Risk?

Retirees must be particularly aware of purchasing power loss since they are living off of a fixed amount of money. They must make sure that their investments earn a rate of return equal to or greater than the rate of inflation so that the value of their nest egg does not decrease each year.

Debt securities and investments that promise fixed rates of returns are the most susceptible to purchasing power risk or inflation. Fixed annuities, certificates of deposit (CDs), and Treasury bonds all fall under these categories.

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Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.

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When production levels rise, the rate of unemployment decreases and an increase in wages leads to a higher demand of goods and services. The increase of demand of goods and services leads to increase of gross domestic policy and inflation.

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When interest rates are high, the Fed focuses on lowering the discount rate. In lowering the discount rate, corporations and companies can borrow to borrow more cheaply.

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Fiscal Policy and Stimulus: Crash Course Economics #8

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Relationship between inflation and unempolyment 

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Relationship between inflation and unempolyment 

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The relationship between inflation and unemployment is a relationship that changes frequently. One simple fact is when inflation is low then the unemployment is high, and when unemployment is low, the inflation is high. For example, if the inflation increases the workers may supply labor because of the higher wages.

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There are basically two types of fiscal policies

Expansionary- when the economy is facing a serious breakdown i.e a peiord of recession which is a period marked by high unemployment … Expansionary policies stimulate economic activities because these policies means government will increase its spending or will lower the taxes. Recession is a phase where aggregrate demand or in lay man language you can say GDP falls down ,with increase in spending and lowering taxes aggregate demand will increase and hence GDP rate will established at a better place .

Contractionary- such policies are opposite of expansionary and are used when the growth rate of economy is getting out of control that is inflation period ,it is where government reduce its spending amd increse the tax rates so that aggregrate demand is reduced ..reduction of government spending will reduce government demand for goods and services where as increased tax rates will leave less amount of disposible income with people and they will reduce their demand.. through this economy can fight with inflationary gap .

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A deficit is the amount by which a sum falls short of some reference amount.

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A deficit is the amount by which a sum falls short of some reference amount.

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Debt is the amount of money owed by a person, firm or government (the borrower) to a lender.

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Debt is the amount of money owed by a person, firm or government (the borrower) to a lender.

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What's all the Yellen About? Monetary Policy and the Federal Reserve: Crash Course Economics #10

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When revenue exceeds spending, it creates a budget surplus. A surplus reduces the debt.

How the US Deficit and Debt Are Different

The U.S. debt exceeded $22 trillion on February 11, 2019. That's more than triple the $6 trillion debt in 2000.

How the Deficit Affects the Debt

The U.S. Treasury must sell Treasury bonds to raise the money to cover the deficit. This type of financing is known as public debt since these bonds are sold to the general public.

In addition to the public debt, the government regularly loans money to itself. This intragovernmental debt is in the form of Government Account Series securities. Most of it comes from the Social Security Trust Fund. That happened in the past when payroll taxes provided more than enough income to cover all Social Security benefits. That's because there were more baby boomers than there were retirees.

But as baby boomers retire, there aren't enough younger workers to pay the taxes needed to cover boomer benefits.

As that happens, Social Security will add to the deficit and the debt. To avoid this, one of three things must happen. Either payroll taxes must be raised or benefits must be lowered. Otherwise, other programs must be cut to pay for Social Security. Legislators are still arguing over the best solution.

How the National Debt Affects the Deficit

The debt affects the deficit in three ways. First, the debt gives a better indication of the true deficit each year. You can more accurately gauge the deficit by comparing each year's debt to the previous year's debt. That's because the deficit, as reported in each year's federal budget, does not include all of the amount owed to the Social Security Trust Fund. That amount is called off-budget.

Second, the interest on the debt is added to the deficit each year. About 5% of the budget goes toward debt interest payments. Interest on the debt hit a record in FY 2011, reaching $454 billion. That beat its prior record of $451 billion in FY 2008, despite lower interest rates. By the FY 2013 budget, the interest payment dropped to $248 billion, as interest rates fell to a 200-year low.

Third, the debt decreases tax revenue in the long run, which further increases the deficit. As the debt continues to grow, creditors become concerned about how the U.S. government will repay it. Over time, creditors, claiming the deficit increases their risk, may demand higher interest rates so that they can receive higher returns. Raising those rates may dampen economic growth.

How Debts and Deficits Affect the Economy

Initially, deficit spending and the resultant debt boost economic growth, especially in a recession. Deficit spending pumps liquidity into the economy. Whether the money goes to jet fighters, bridges, or education, it ramps up production and creates jobs.

Not every dollar creates the same number of jobs. For example, military spending creates 8,555 jobs for every $1 billion spent. That's less than half the jobs created by $1 billion spent on construction. For that reason, the military is not the best unemployment solution.

In the long run, debt can damage the economy because of higher interest rates. Other issues occur if the U.S. government lets the value of the dollar fall. One effect is that the debt repayment will be in cheaper dollars. As this happens, foreign governments and investors become less willing to buy Treasury bonds, which forces interest rates even higher.

Rising debts and deficits may endanger Social Security. As the government devotes more of its revenues to pay the mandatory cost of Social Security, it has less money on hand to stimulate the economy, which can further slow growth.

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The Difference Between the Deficit Versus the Debt

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When revenue exceeds spending, it creates a budget surplus. A surplus reduces the debt. The U.S. debt exceeded $22 trillion on February 11, 2019. That's more than triple the $6 trillion debt in 2000. The U.S. Treasury must sell Treasury bonds to raise the money to cover the deficit.

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Budget deficit is the amount by which a government's expenditures such as defense, social security, science, energy and expenditure on infrastructure, exceed its total income which comes principally from taxes

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By Jared Perry, Allison Scott, Josh Stanton, Kay Adversario

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By Jared Perry, Allison Scott, Josh Stanton, Kay Adversario

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Macroeconomics: Crash Course Economics #5

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Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. These two policies are used in various combinations to direct a country's economic goals. Here we look at how fiscal policy works, how it must be monitored and how its implementation may affect different people in an economy.

Before the Great Depression, which lasted from Sept. 4, 1929, to the late 1930s or early 1940s, the government's approach to the economy was laissez-faire. Following World War II, it was determined that the government had to take a proactive role in the economy to regulate unemployment, business cycles, inflation and the cost of money. By using a mix of monetary and fiscal policies (depending on the political orientations and the philosophies of those in power at a particular time, one policy may dominate over another), governments can control economic phenomena.

How Fiscal Policy Works

Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when between 2-3%), increases employment and maintains a healthy value of money. Fiscal policy plays a very important role in managing a country's economy. For example, in 2012 many worried that the fiscal cliff, a simultaneous increase in tax rates and cuts in government spending set to occur in January 2013, would send the U.S. economy back to being in a recession. The U.S. Congress avoided this problem by passing the American Taxpayer Relief Act of 2012 on Jan. 1, 2013.

Balancing Act

The idea is to find a balance between changing tax rates and public spending. For example, stimulating a stagnant economy by increasing spending or lowering taxes runs the risk of causing inflation to rise. This is because an increase in the amount of money in the economy, followed by an increase in consumer demand, can result in a decrease in the value of money - meaning that it would take more money to buy something that has not changed in value.

Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down, and businesses are not making substantial profits. A government may decide to fuel the economy's engine by decreasing taxation, which gives consumers more spending money, while increasing government spending in the form of buying services from the market (such as building roads or schools). By paying for such services, the government creates jobs and wages that are in turn pumped into the economy. Pumping money into the economy by decreasing taxation and increasing government spending is also known as " pump priming." In the meantime, overall unemployment levels will fall.

With more money in the economy and fewer taxes to pay, consumer demand for goods and services increases. This, in turn, rekindles businesses and turns the cycle around from stagnant to active.

If, however, there are no reins on this process, the increase in economic productivity can cross over a very fine line and lead to too much money in the market. This excess in supply decreases the value of money while pushing up prices (because of the increase in demand for consumer products). Hence, inflation exceeds the reasonable level.

For this reason, fine tuning the economy through fiscal policy alone can be a difficult, if not improbable, means to reach economic goals. If not closely monitored, the line between a productive economy and one that is infected by inflation can be easily blurred.

When the Economy Needs to Be Curbed ...

When inflation is too strong, the economy may need a slowdown. In such a situation, a government can use fiscal policy to increase taxes to suck money out of the economy. Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation. Of course, the possible negative effects of such a policy, in the long run, could be a sluggish economy and high unemployment levels. Nonetheless, the process continues as the government uses its fiscal policy to fine-tune spending and taxation levels, with the goal of evening out the business cycles.

Who Does Fiscal Policy Affect?

Unfortunately, the effects of any fiscal policy are not the same for everyone. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class.

Similarly, when a government decides to adjust its spending, its policy may affect only a specific group of people. A decision to build a new bridge, for example, will give work and more income to hundreds of construction workers. A decision to spend money on building a new space shuttle, on the other hand, benefits only a small, specialized pool of experts, which would not do much to increase aggregate employment levels.

That said, the markets also react to fiscal policy.Stocks rose on Thursday, Dec. 21, for the first time in three days following passage of the Trump administration's $1.5 trillion U.S. tax bill, the "Tax Cuts and Jobs Act." The Dow Jones Industrial Average gained 99 points, or 0.4%, the S&P 500 rose 0.25%, and the Nasdaq was up 0.14%.

The tax overhaul is forecast to raise the federal deficit by hundreds of billions of dollars - and perhaps as much as $2.0 trillion - over the coming decade. Estimates vary depending on assumptions about how much economic growth the law will spur. The law cuts corporate tax rates permanently by creating a single corporate tax rate of 21% and repeals the corporate alternative minimum tax.

The law also retains the current structure of seven individual income tax brackets, but in most cases it lowers the rates: the top rate falls from 39.6% to 37%, while the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%, and the 35% bracket is also unchanged. These changes are set to expire after 2025.

The Bottom Line

One of the biggest obstacles facing policymakers is deciding how much involvement the government should have in the economy. Indeed, there have been various degrees of interference by the government over the years. But for the most part, it is accepted that a degree of government involvement is necessary to sustain a vibrant economy, on which the economic well-being of the population depends.

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Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. These two policies are used in various combinations to direct a country's economic goals.

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" deficit is the difference between what the U.S. Government takes in from taxes and other revenues, called receipts, and the amount of money it spends, called outlays. The items included in the deficit are considered either on-budget or off-budget

You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses. The on-budget deficits require the U.S. Treasury to borrow money to raise cash needed to keep the government operating. It borrows the money by selling securities to the public.

The Treasury securities issued to the public and to the Government Trust Funds then become part of the total debt."

https://www.aarp.org/politics-society/government-elections/national-debt-guide/faqs/whats-the-difference-between-debt-and-deficit/

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"Inflation is the rising price of goods and services over time."

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Inflation is the increase in the prices of goods and services over time. It's an economics term that means you have to spend more to fill your gas tank, buy a gallon of milk, or get a haircut. Inflation increases your cost of living.

The inflation rate is the percent increase or decrease in prices during a specified period. It's usually over a month or a year. The percentage tells you how quickly prices rose during the period. For example, if the inflation rate for a gallon of gas is 2 percent a year, then gas prices will be 2 percent higher next year. That means a gallon that costs $2.00 this year will cost $2.04 next year.

If the inflation rate is more than 50 percent in a month, that's hyperinflation. If inflation occurs at the same time as a recession, that's stagflation. Rising prices in assets like housing, gold or stocks are called asset inflation.

Some sources say that an increase in the money supply also causes inflation. That's a misinterpretation of the theory of monetarism. It says the primary cause of inflation is the printing out of too much money by the government. As a result, too much capital chases too few goods. It creates inflation by triggering either demand-pull or cost-push inflation.

The U.S. Bureau of Labor Statistics uses the Consumer Price Index to measure inflation. The index gets its information from a survey of 23,000 businesses. It records the prices of 80,000 consumer items each month. The CPI will tell you the general rate of inflation. The Bureau of Labor Statistics chart below uses the CPI to track the inflation rate between 2008 and 2018.

Some sources wrongly say there is a difference between inflation and CPI. But there is no difference. The CPI is a tool that measures inflation. It's not a different form of inflation.

Central banks throughout the world use monetary policy to avoid inflation and its opposite deflation. In the United States, the Fed aims for a target inflation rate of 2 percent year-over-year. It uses the core inflation rate that removes energy and food prices. Those prices are set by commodities traders and are too volatile to take into consideration.

The most powerful way to protect yourself from inflation is to increase your earning ability and income. A 5 percent annual raise, or a promotion that nets you a 20 percent gain, will make inflation irrelevant. But if that's not an option, or you are on a fixed income, then you'll need to explore other options.

The best way to protect your savings is to invest in the stock market. It has returned around 10 percent over time. Whether it will do so in the future is unknown, and there's the risk. As always, consult with your financial planner before making any financial decision to be sure this fits within your goals.

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Why Inflation Is as "Violent as a Mugger"

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Inflation is the increase in the prices of goods and services over time. It's an economics term that means you have to spend more to fill your gas tank, buy a gallon of milk, or get a haircut. Inflation increases your cost of living.

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Bonds (Corporate Bonds, Municipal Bonds, Government Bonds, etc.) Explained in One Minute

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Definition: Fiscal policy is the government spending and taxation that influences the economy. Elected officials should coordinate with monetary policy to create healthy economic growth. They usually don't. Why? Fiscal policy reflects the priorities of individual lawmakers. They focus on the needs of their constituencies. These local needs overrule national economic priorities. As a result, fiscal policy is hotly debated, whether at the federal, state, county or municipal level.

Types of Fiscal Policy

There are two types of fiscal policy. The first, and most widely-used, is expansionary. It stimulates economic growth. It's most critical at the contraction phase of the business cycle. That's when voters are clamoring for relief from a recession.

How does it work? The government either spends more, cuts taxes, or does both if it can. The idea is to put more money into consumers' hands, so they spend more. That jump starts demand, which keeps businesses running and adds jobs. Politicians debate about which works better. Advocates of supply-side economics prefer tax cuts. They say it frees up businesses to hire more workers to pursue business ventures. For more, see Do Tax Cuts Create Jobs?

Advocates of demand-side economics say additional spending is more effective than tax cuts. Examples include public works projects, unemployment benefits and food stamps. The money goes into the pockets of consumers, who go right out and buy the things businesses produce.

For more, see Unemployment Solutions, How Extended Unemployment Benefits Boost the Economy and 14 Ways to Create Jobs.

Expansionary fiscal policy is usually impossible for state and local government. That's because they are mandated to keep a balanced budget. If they haven't created a surplus during the boom times, they must cut spending to match lower tax revenue during a recession.

That makes the contraction worse.

Fortunately, the federal governmen t has no such constraints, so it can use expansionary policy when needed. Unfortunately, it also means Congress created budget deficits even during economic booms. That's despite a national debt ceiling. As a result, the critical debt-to-GDP ratio has exceeded 100 percent.

The second type, contractionary fiscal policy, is rarely used. That's because its goal is to slow economic growth. Why would you ever want to do that? One reason only, and that's to stamp out inflation. That's because the long-term impact of inflation can damage the standard of living as much as a recession.

The tools of contractionary fiscal policy are used in reverse. Taxes are increased, and spending is cut. You can imagine how wildly unpopular this is among voters. Thus, it's hardly ever used. Fortunately, contractionary monetary policy is effective in preventing inflation.

Tools of Fiscal Policy

The first tool is taxation. That includes income, capital gains from investments, property, sales or just about anything else. Taxes provide the major revenue source that funds the government. The downside of taxes is that whatever or whoever is taxed has less income to spend on themselves.

That makes taxes unpopular. Find out how the U.S. federal budget is funded in Federal Income and Taxes.

The second tool is government spending. That includes subsidies, transfer payments including welfare programs, public works projects and government salaries. Whoever receives the funds has more money to spend. That increases demand and economic growth.

The federal government is losing its ability to use discretionary fiscal policy. Each year, more of the budget must go to mandated programs. As the population ages, the costs of Medicare, Medicaid, and Social Security are rising. Changing the mandatory budget requires an Act of Congress and that takes a long time. One exception was the ARRA, or Economic Stimulus Act, which Congress passed quickly. That's because legislators knew they must stop the worst recession since the Great Depression.

Fiscal Policy vs. Monetary Policy

Monetary policy is when a nation's central bank changes the money supply. It increases it with expansionary monetary policy and decreases it with contractionary monetary policy. It has many tools it can use, but it primarily relies on raising or lowering the fed funds rate. This benchmark rates then guides all other interest rates. When interest rates are high, the money supply contracts, the economy cools down, and inflation is prevented. When interest rates are low, the money supply expands, the economy heats up, and a recession is usually avoided.

Monetary policy works faster than fiscal policy. The Fed can just vote to raise or lower rates at its regular Federal Open Market Committee meeting. It may take about six months for the impact of the rate cut to percolate throughout the economy.

Current Budget Spending

Congress outlines U.S. fiscal policy priorities in each year's federal budget. By far, the largest portion of budget spending is mandatory, which means that existing laws dictate how much will be spent. Most of this is for Social Security, Medicare, and Medicaid entitlement programs.

The remaining portion of spending is discretionary. More than half of this goes toward defense. Find out more in U.S. Budget and Spending Primer. ​The current fiscal policy has created the massive U.S. debt level.

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3 Out of 4 Presidents Agree: Expansionary Fiscal Policy Is Best

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Definition: Fiscal policy is the government spending and taxation that influences the economy. Elected officials should coordinate with monetary policy to create healthy economic growth. They usually don't. Why? Fiscal policy reflects the priorities of individual lawmakers. They focus on the needs of their constituencies. These local needs overrule national economic priorities.

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Balanced budget is a budget in which revenues equal or exceed expenditures. A balanced budget is thought to be positive for a company, as it means that the company is not taking on any (additional) debt in order to conduct its operations; if revenues exceed expenditures, it results in a profit.

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https://www.youtube.com/watch?v=WKZvm_fqYRM

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continuously updated us national debt clock real time us debt clock

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US National Debt Clock : Real Time U.S. National Debt Clock

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a surplus is the opposite of deficit. A surplus is used to describe many excess assets including income, profits, capital, and goods. A surplus often occurs in a budget, when expenses are less than the income taken in or in inventory when fewer supplies are used than were retained.Economic surplus is related to supply and demand.

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The words debt and deficit come up frequently in discussions about the policy decisions that lawmakers face and are often confused for one another. So what exactly are the differences between the deficit and the debt?

What Is the Federal Budget Deficit?

The deficit is the annual difference between government spending and government revenue. Every year, the government takes in revenues in the form of taxes and other income, and spends money on various programs, such as national defense, Social Security, and healthcare. If the government spends more than it takes in, then it runs a deficit. If the government takes in more than it spends, it runs a surplus.

The U.S. government has run a deficit since 1970 in all but four years (1998-2001) and annual deficits are projected to increase from now to 2053.

What Is the Federal Debt?

The debt is the total amount of money the U.S. government owes. It represents the accumulation of past deficits, minus surpluses. Debt is like the balance on your credit card statement, which shows the total amount you have accrued over time. The Congressional Budget Office found that debt held by the public in 2022 was $24.3 trillion, or 97 percent of GDP..

Historically, periods with spikes in deficits and corresponding increases in the national debt have been periods associated with war or a severe economic downturn. Today, deficits have become the norm and are no longer caused by periodic spikes in wartime or recession-related spending, but rather by a long-term, structural mismatch between spending and revenues.

Looking Forward

By addressing that mismatch, policymakers can put our nation on a better path for economic growth, opportunity, and prosperity. A strong fiscal foundation creates positive conditions for growth, including increased access to capital, more resources for public and private investments in our future, improved consumer and business confidence, and a stronger safety net. No single approach will be perfect in everyone's eyes, but leaders can draw upon the many good ideas that have been put forward from across the ideological spectrum in order to help ensure a brighter economic future for the next generation.
Related: Top 10 Reasons Why The National Debt Matters

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Debt vs. Deficits: What's the Difference?

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The words debt and deficit come up frequently in debates and conversations about the policy decisions that lawmakers face. The two concepts are similar, but are often confused.

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The debt-to-GDP ratio compares a country's sovereign debt to its total economic output for the year. Its output is measured by gross domestic product.

This ratio is a useful tool for investors, leaders, and economists. It allows them to gauge a country's ability to pay off its debt. A high ratio means a country isn't producing enough to pay off its debt. A low ratio means there is plenty of economic output to make the payments.

If a country were a household, GDP is like its income. Banks will give you a bigger loan if you make more money. In the same way, investors will be happy to take on a country's debt if it produces more. Once investors begin to worry about repayment, they will demand more interest rate return for the higher risk of default. That increases the country's cost of debt. It can quickly become a debt crisis.

Tipping Point

What's the tipping point? A study by the World Bank found that if the debt-to-GDP ratio exceeds 77 percent for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 1.7 percent in economic growth.

It's even worse for emerging markets. There, each additional percentage point of debt above 64 percent will slow growth by 2 percent each year.

How to Use the Debt-to-GDP Ratio

The debt-to-GDP ratio allows investors in government bonds to compare debt levels between countries.

For example, Germany's debt is $2.7 trillion, dwarfing that of Greece, which is $514 billion. But Germany's GDP is $3.8 trillion, much more than Greece's $281 billion. That's why Germany (the largest country in the EU) had to bail out Greece, and not the other way around. The debt-to-GDP ratio for Germany is a comfortable 72 percent, while that for Greece is 182 percent.

So, is the debt-to-GDP ratio a good predictor of which country will default? Not always. Japan's debt-to-GDP ratio is 228 percent. Japan is not in danger of default, because most of its debt is held by its own citizens. A lot of Greece's debt was held by foreign governments and banks. As Greece's bank notes became due, its debt was downgraded by ratings agencies like Standard & Poor's, which made interest rates rise. Greece had to find a way to raise more revenue, and undertook spending cuts and tax increases to do so. This further slowed its economy, further reducing revenue and its ability to pay down its debt.

In 2017, the U.S. debt-to-GDP ratio was 104 percent. ​That's $20.493 trillion in debt (December 29, 2017) divided by $19.739 trillion for fourth quarter GDP. But that's not a critical for a country which can issue debt in its own currency. The United States can simply print more dollars to pay off the debt. For this reason, the risk of default is very low. On the other hand, the debt holders wind up with money that's worth less. This will eventually make them avoid U.S. debt.

As a country's debt-to-GDP ratio rises, it often signals that a recession is underway. That's because a country's GDP decreases in a recession.

It causes taxes, and federal revenue, to decline at exactly the same time the government spends more to stimulate its economy. If the stimulus spending is successful, the recession will lift, taxes (and federal revenues) will rise, and the debt-to-GDP ratio should level off.

The best determinant of investors' faith in a government's solvency is the yield on its debt. When yields are low, that means there is a lot of demand for its debt. It doesn't have to pay as high a return. The United States has been fortunate in that regard. During the Great Recession, investors fled to U.S. debt. It is considered ultra-safe.

As the global economy continues to improve, investors will be comfortable with higher risk because they want higher returns. Yields on U.S. debt will rise asdemand falls.When yields are high, look out.

That means investors don't want the debt. The country must pay more interest to get them to buy its bonds.

That creates a downward spiral. High interest rates make it more expensive for the country to borrow. This increases fiscal spending, which creates a larger budget deficit, which creates more debt. A good example is the Greece debt crisis.

That's why the debt-to-GDP ratio, for all its faults, is still widely used. It's a good rule of thumb that indicates how strong a country's economy is, and how likely it is to use good faith to pay off its debt.

How to Calculate the Debt-to-GDP Ratio

To figure the debt-to-GDP ratio, you've got to know two things: the country's debt level and the country's economic output. This seems pretty straightforward until you find out that debt is measured in two ways. Most analysts look at total debt. Some, like the CIA World Factbook, only looks at public debt.

That's a little misleading. In the United States, all debt is essentially owned by the public. Here's why. The U.S. Treasury has two categories. Debt held by the public consists of U.S. Treasury notes or U.S. Savings Bonds owned by individual investors, companies, and foreign governments. Public debt is also owned by pension funds, mutual funds, and local governments.

The other category is Intragovernmental Holdings. This is the category not reported by the CIA World Factbook because it's debt the federal government owes to itself, not to outside lenders. The CIA figures if the government doesn't repay itself, so what? It's just a method of accounting between two agencies.

But it does matter a lot. The money the federal government "owes itself" is really owed mostly to the Social Security Trust Fund and federal department retirement funds. Thanks to the Baby Boomer generation, these agencies take in more revenue from payroll taxes than they have to pay out in benefits right now. That means they have excess cash, which they use to buy Treasurys. The government just spends this excess cash on all government programs.

When the Boomers retire, Social Security will cash in its Treasury holdings to pay benefits. But the cash to pay this debt will have to come from somewhere. That means the Treasury will have to issue more debt or Congress must raise taxes.

Therefore, you should always look at the total debt, not just the debt owed to the public. That's because all federal debt is eventually owed to the public. That's why Intragovernmental Holdings should be counted in the ​U.S. ​debt-to-GDP ratio.

Debt-to-GDP Frequently Asked Questions

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The debt-to-GDP ratio compares a country's sovereign debt to its total economic output for the year. Its output is measured by gross domestic product. This ratio is a useful tool for investors, leaders, and economists. It allows them to gauge a country's ability to pay off its debt.

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Budget Deficit = Government's Total Expenditures − Government's Total Income

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Fiscal policy affects the demand through changes in government spending and taxation. The fiscal policy are the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy, therefore meaning that demand will affected as the government alters the tax rates and one flowing throughout the economy through spending meaning that production levels will change. A change in production levels affects demand rates a if tax rates go up, so will prices for products and less will be produced, causing higher demand rates.

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Inflation can mean either an increase in the money supply (i.e. the government printing more money) or an increase in price levels. Increase in money supply will increase prices of products and services because an ample supply of "easy money" will encourage people to spend it fast and increase the demand for all kinds of "goodies", causing their prices to increase.

On the surface, inflation is good, since high demand will encourage companies to increase production and this will improve the overall throughput and GDP. Improved GDP will strengthen the stock market, because investors are always excited about companies' profitability which has a strong link to higher production throughput and enhanced GDP.

GDP

However, too much GDP growth is also dangerous, as it will most likely come with an increase in inflation, which erodes stock market gains by making our money (and future corporate profits) less valuable. Most economists today agree that 2.5-3.5% GDP growth per year is the most that our economy can safely maintain without causing negative side effects. Why so?

In order to answer that question, we need to better understand the relationship between inflation, GDP and unemployment rate.

Historical data suggests that annual GDP growth in excess of 2.5% will caused a 0.5% drop in unemployment rate for every percentage point of GDP over 2.5%. It sounds like the perfect way to kill two birds with one stone - increase overall GDP while lowering the unemployment rate. Unfortunately this positive relationship starts to break down when employment rate gets below 4%. (The current US unemployment rate is ~ 7% so GDP can increase further without putting a strain on inflation rate). Extremely low unemployment rates have proved to be more costly than valuable, because an economy operating near full employment will increase the inflation rate for two important reasons:

1. Demand for goods and services will increase faster than supply, causing prices to increase.

2. Companies will have to raise employee's salaries as a result of the tight labor market. This increase will be passed on to consumers in the form of higher prices as the company looks to maximize profits.

Over time, the growth in GDP coupled with a tight labor market will increase the inflation rate. Increased inflation can quickly spiral out of control. People will spend more money because they know that it will be less valuable in the future. This will further increases the GDP in the short term, bringing about further price increases. Higher inflation rate will have an exponential effect on prices, rapidly eroding the consumer buying power. This in turn will slow the economy down, will reduce GDP, and will increase unemployment rate.

A delicate balance must be maintained between the three pillars of the economy: inflation rate, GDP and unemployment rate, in order to keep the economy churning.

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The Three Pillars of the Economy: Inflation, GDP and Unemployment

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Inflation can mean either an increase in the money supply (i.e. the government printing more money) or an increase in price levels. Increase in money supply will increase prices of products and services because an ample supply of "easy money" will encourage people to spend it fast and increase the demand for all kinds of "goodies", causing their prices to increase.

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Promote maximum employment, stable prices, and moderate long-term interest rates.

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The monetary value of all the finished goods and services produced within a country's borders in a specific time period.

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Structural: Long lasting unemployment caused by fundamental shifts in an economy and exacerbated by extraneous factors.

Frictional: Exist in any economy due to people being in the process of moving from one job to another.

Cyclical: Relates to the cyclical trends in growth and production that occur within the business cycle.

Voluntary: One who rejects a job while looking for another with better pay or benefits

Seasonal: Occurs when there is a limited need for a type of work to be performed during a particular time of year.

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Unemployment is defined as people who are without work and actively looking for employment.

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The current unemployment rate is 4.1% which is less than a perfect unemployment rate, 5%, but isn't horrible.

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An example of frictional unemployment would be if I had just quit my job or gotten fired and am currently unemployed in the process of looking for another job.

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*overall demand for goods and services that the economy cannot support full employment
*occurs during slow economic growth
*when people don't demand for goods and services the business revenues decrease
*An example would be a "loss of construction jobs during 2008 financial crisis"
*one way to help cyclical unemployment is to lower interest rates from the federal reserve

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The unemployment rate of a country is a very common measure for determining the health of an economy. When a person loses their job it is hard for them to pay rent and get food, therefore the quality of life. It effects society by increasing the crime rate in order for individuals to meet their needs.

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The rate of inflation is the measure of the increase in the price of goods overtime. The measure of inflation is important because it lets people know what their purchasing power is.

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Investors are likely to hear the terms inflation and gross domestic product (GDP) just about every day. They are often made to feel that these metrics must be studied as a surgeon would study a patient's chart before operating. The chances are that we have some concept of what they mean and how they interact, but what do we do when the best economic minds in the world can't agree on fundamental distinctions between how much the U.S. economy should grow, or how much inflation is too much for the financial markets to handle? Individual investors need to find a level of understanding that assists their decision-making without inundating them in piles of data. Find out what inflation and GDP mean for the market, the economy and your portfolio.

Terminology

Before we begin our journey into the macroeconomic village, let's review the terminology we'll be using.

Inflation
Inflation can mean either an increase in the money supply or an increase in price levels. When we hear about inflation, we are hearing about a rise in prices compared to some benchmark. If the money supply has been increased, this will usually manifest itself in higher price levels-it is simply a matter of time. For the sake of this discussion, we will consider inflation as measured by the core Consumer Price Index (CPI), which is the standard measurement of inflation used in the U.S. financial markets. Core CPI excludes food and energy from its formulas because these goods show more price volatility than the remainder of the CPI. (To read more on inflation, see All About Inflation, Curbing The Effects Of Inflation and The Forgotten Problem Of Inflation.)

Gross domestic product in the United States represents the total aggregate output of the U.S. economy. It is important to keep in mind that the GDP figures as reported to investors are already adjusted for inflation. In other words, if the gross GDP was calculated to be 6% higher than the previous year, but inflation measured 2% over the same period, GDP growth would be reported as 4% or the net growth over the period. (To learn more about GDP, read Macroeconomic Analysis, Economic Indicators To Know and What is GDP and why is it so important?)

The Slippery Slope

The relationship between inflation and economic output (GDP) plays out like a very delicate dance. For stock market investors, annual growth in the GDP is vital. If overall economic output is declining or merely holding steady, most companies will not be able to increase their profits, which is the primary driver of stock performance. However, too much GDP growth is also dangerous, as it will most likely come with an increase in inflation, which erodes stock market gains by making our money (and future corporate profits) less valuable. Most economists today agree that 2.5-3.5% GDP growth per year is the most that our economy can safely maintain without causing negative side effects. But where do these numbers come from? To answer that question, we need to bring a new variable, unemployment rate, into play. (For related reading, see Surveying The Employment Report.)

Studies have shown that over the past 20 years, annual GDP growth over 2.5% has caused a 0.5% drop in unemployment for every percentage point over 2.5%. It sounds like the perfect way to kill two birds with one stone - increase overall growth while lowering the unemployment rate, right? Unfortunately, however, this positive relationship starts to break down when employment gets very low, or near full employment. Extremely low unemployment rates have proved to be more costly than valuable because an economy operating at near full employment will cause two important things to happen:

1. Aggregate demand for goods and services will increase faster than supply, causing prices to rise.

2. Companies will have to raise wages as a result of the tight labor market. This increase usually is passed on to consumers in the form of higher prices as the company looks to maximize profits. (To read more, see Cost-Push Versus Demand-Pull Inflation.)

Over time, the growth in GDP causes inflation, and inflation begets hyperinflation. Once this process is in place, it can quickly become a self-reinforcing feedback loop. This is because in a world where inflation is increasing, people will spend more money because they know that it will be less valuable in the future. This causes further increases in GDP in the short term, bringing about further price increases. Also, the effects of inflation are not linear; 10% inflation is much more than twice as harmful as 5% inflation. These are lessons that most advanced economies have learned through experience; in the U.S., you only need to go back about 30 years to find a prolonged period of high inflation, which was only remedied by going through a painful period of high unemployment and lost production as potential capacity sat idle.

"Say When"

So how much inflation is "too much"? Asking this question uncovers another big debate, one argued not only in the U.S,. but around the world by central bankers and economists alike. There are those who insist that advanced economies should aim to have 0% inflation, or in other words, stable prices. The general consensus, however, is that a little inflation is actually a good thing.

The biggest reason behind this argument in favor of inflation is the case of wages. In a healthy economy, sometimes market forces will require that companies reduce real wages, or wages after inflation. In a theoretical world, a 2% wage increase during a year with 4% inflation has the same net effect to the worker as a 2% wage reduction in periods of zero inflation. But out in the real world, nominal (actual dollar) wage cuts rarely occur because workers tend to refuse to accept wage cuts at any time. This is the primary reason that most economists today (including those in charge of U.S. monetary policy) agree that a small amount of inflation, about 1-2% a year, is more beneficial than detrimental to the economy.

The Federal Reserve and Monetary Policy

The U.S. essentially has two weapons in its arsenal to help guide the economy toward a path of stable growth without excessive inflation; monetary policy and fiscal policy. Fiscal policy comes from the government in the form of taxation and federal budgeting policies. While fiscal policy can be very effective in specific cases to spur growth in the economy, most market watchers look to monetary policy to do most of the heavy lifting in keeping the economy in a stable growth pattern. In the United States, the Federal Reserve Board's Open Market Committee (FOMC) is charged with implementing monetary policy, which is defined as any action to limit or increase the amount of money that is circulating in the economy. Whittled down, that means the Federal Reserve (the Fed) can make money easier or harder to come by, thereby encouraging spending to spur the economy and constricting access to capital when growth rates are reaching what are deemed unsustainable levels.

Before he retired, Alan Greenspan was often (half seriously) referred to as being the most powerful person on the planet. Where did this impression come from? Most likely it was because Mr. Greenspan's position (now Ben Bernanke's) as Chairman of the Federal Reserve provided him with special, albeit un-sexy, powers - chiefly the ability to set the Federal Funds Rate. The "Fed Funds" rate is the rock-bottom rate at which money can change hands between financial institutions in the United States. While it takes time to work the effects of a change in the Fed Funds rate (or discount rate) throughout the economy, it has proved very effective in making adjustments to the overall money supply when needed. (To continue reading about the Fed, see Formulating Monetary Policy, The Federal Reserve and A Farewell To Alan Greenspan.)

Asking the small group of men and women of the FOMC, who sit around a table a few times a year, to alter the course of the world's largest economy is a tall order. It's like trying to steer a ship the size of Texas across the Pacific - it can be done, but the rudder on this ship must be small so as to cause the least disruption to the water around it. Only by applying small opposing pressures or releasing a little pressure when needed can the Fed calmly guide the economy along the safest and least costly path to stable growth. The three areas of the economy that the Fed watches most diligently are GDP, unemployment, and inflation. Most of the data they have to work with is old data, so an understanding of trends is very important. At its best, the Fed is hoping to always be ahead of the curve, anticipating what is around the corner tomorrow so it can be maneuvered around today.

The Devil Is in the Details

There is as much debate over how to calculate GDP and inflation as there is about what to do with them when they're published. Analysts and economists alike will often start picking apart the GDP figure or discounting the inflation figure by some amount, especially when it suits their position in the markets at that time. Once we take into account hedonic adjustments for "quality improvements," reweighting and seasonality adjustments, there isn't much left that hasn't been factored, smoothed, or weighted in one way or another. Still, there is a methodology being used, and as long as no fundamental changes to it are made, we can look at rates of change in the CPI (as measured by inflation) and know that we are comparing from a consistent base.

Implications for Investors

Keeping a close eye on inflation is most important for fixed-income investors, as future income streams must be discounted by inflation to determine how much value today' money will have in the future. For stock investors, inflation, whether real or anticipated, is what motivates us to take on the increased risk of investing in the stock market, in the hope of generating the highest real rates of return. Real returns (all of our stock market discussions should be pared down to this ultimate metric) are the returns on investment that are left standing after commissions, taxes, inflation and all other frictional costs are taken into account. As long as inflation is moderate, the stock market provides the best chances for this compared to fixed income and cash.

There are times when it is most helpful to simply take the inflation and GDP numbers at face value and move on; after all, there are many things that demand our attention as investors. However, it is valuable to re-expose ourselves to the underlying theories behind the numbers from time to time so that we can put our potential for investment returns into the proper perspective.

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Investors are likely to hear the terms inflation and gross domestic product (GDP) just about every day. They are often made to feel that these metrics must be studied as a surgeon would study a patient's chart before operating.

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1. Structural Unemployment: unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.

2. Reason 1: One cause of structural unemployment is technological advances in an industry such as take out electronic orders in restaurants.

Reason 2: Trade agreements are other causes because industries moved their business to mexico when the trade restrictions were lifted causing their employees to lose their jobs and be left in america.